| Institution: | (1) Fisher College of Business, The Ohio State University, 2100 Neil Avenue, Columbus, OH, 43210-1144;(2) Graduate School of Industrial Administration, Carnegie Mellon University, Tech and Frew Streets, Pittsburgh, PA, 15213-3890;(3) Yale School of Management, 135 Prospect Street, New Haven, CT, 06520-8200;(4) The Anderson School at UCLA, 110 Westwood Plaza, Los Angeles, CA, 90095-1481 |
| Abstract: | One role of accounting is to discipline softer (more manipulable) sources of information. We use a principal-agent model of hidden actions and hidden information to study this role. In our model, there is both a verifiable signal (a publicly observed output) and an unverifiable signal (a productivity parameter privately observed by the agent). In a one-period setting, the optimal contract does not make use of the agent s report on the private signal. However, when the output is tracked over two periods, the agents communication can be valuable. This reversal of results suggests uncovering the disciplining role of accounting may require a long-term perspective.JEL Classification: D82, M41 |
